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Tax Talent & Culture

What are the key elements of succession planning for law and accounting firms?

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Succession planning is a vital component for any organization’s talent strategy, and it is table stakes for most large corporate institutions. Too often, unfortunately, succession planning is a more often discussed as a strategic plan rather than practiced as an essential component of an overall human capital strategy for many legal and accounting firms.

“An accounting firm’s assets are their people,” says Fred R. Berk, co-managing partner at Friedman, a tax & accounting consulting firm. “Constant planning, training, and strategic hiring are of significant importance to ensure transitions of key personnel in an orderly fashion.”

With that said, historically legal and accounting firms have been slow to embrace well-planned succession management. Kathleen Brady, managing director and head of coaching at Preferred Transition Resources, describes the conundrum of succession and retirement planning as one that is “fraught with emotion” that forces us to “explore personal, societal, and industry assumptions around aging, financial security, health and wellness, and, dare I say, mortality.”

For the most part, Brady adds, this has been the status quo action for law firms. “It makes everyone uncomfortable, so we opt to ignore it.”

For law firm and accounting firms, the most sensitive area around succession planning by far is the difficulty in approaching the soon-to-be-transitioning partner. “Emotions can be mitigated by incorporating the idea of a post-practice transition into the firm’s overall talent management strategy — similar to the way firms have institutionalized orientations, mid-level, and new partner retreats,” notes Brady, adding that the key is for the firm to understand the retiring partner’s plan for leaving the organization and providing support.

Knowing the retiring partners target date, for example, will allow the firm to gather the resources in place to assist the partner in their personal planning as well as to deal with the more emotional parts of retirement.

In addition, both law firms and accounting firms generally agree on the importance of several other key steps needed to build solid succession plan for partners. These steps include:

  • Grasping the departing partners’ client reach and what other parts of the firm the partner touches — Having a good picture of the transitioning partner’s big revenue-producing relationships and any internal and industry commitments can create potential growth opportunities for remaining high-potential talent within the firm.

  • Knowing the firm’s rising stars — Identifying the well-respected candidates who are ready to take over client relationships within a particular practice, for example, is another essential step that both accounting and law firms agree is important.

  • Creating training and development plans for successors — Once the internal candidates are identified, the retiring partner, along with the firm’s human resources leaders, can assess the candidates’ ability to become the new relationship owner. This will require the firm to put together a training and development plan to best address any current leadership, skill, or knowledge gaps among the candidates.

  • Involving clients in the selection of the successor — Giving clients a say in terms of who takes over the relationship is a critical element that both law firms and accounting firms indicate is important for sustaining that client’s satisfaction.

  • Developing incentives and tweaking compensation practices — A common but problematic scenario that often arises at this time is the compensation policy of accounting and law firms. In many cases, these policies work against a successful succession because rewards may be focused on originations. And this often compels partners to perceive their revenue-producing relationships as “my clients” rather than “the firm’s clients.”

Further, within these steps, large variations between accounting and law firms exist in practice. More specifically:

Proactively bringing up retirement and succession planning — “To execute a successful transition of clients and responsibilities, it is critical to proactively and continually discuss retirement and succession planning,” notes Friedman’s Berk, adding that succession planning is one of the key determining factors for continued prosperity and longevity of a firm. Friedman has found success in establishing “a culture where everyone knows there is, or will be, a specific plan for each and every individual’s succession, with no exceptions,” Berk says. In contrast, few law firms have formal succession planning processes, even though now they are talking about it more, according to Janet Stanton, a partner at Adam Smith, Esq.

Differing approaches to pay-outs, post-retirement — Another variation between law firms and accounting firms is the alignment of compensation incentives following a partner’s succession. For accounting firms, the typical retirement payout period is typically 10 years, with the total aggregate amount payable to retired partners each year usually capped at some portion of the annual revenue or net income. On the law firm side, however, the financial ties to the firm, post-retirement generally don’t exist.

Multi-layered communication — No succession plan goes well without good communication among the person who is leaving, the individual or individuals who will be succeeding them, the clients, and other colleagues within the firm. With the culture of the organization impacting the scope of the communication around one partner’s retirement, both law firms and accounting firms could improve their communications to promote better transparency. “Dialogue is the only way to come up with workable solutions for everyone,” Brady notes.

Getting past the microculture that “it’s my client. and I know what’s best” which permeates the culture of partners in both legal and accounting firms is essential, not just for good communication, but to create a winning strategy for the client, the retiring partner, firm lawyers, and the firm itself.

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